Spot trading is directly buying and directly selling financial assets such as crypto, stocks, forex or bonds. The platform where you bought the asset immediately delivers that asset. Hence, making spot trading the first-paced environment. Spot markets are usually hosted on an exchange or through an over-the-counter interface. Traders use their assets only when trading spots, there is neither margin nor leverage.

A primary feature of spot markets is they are usually open for trading to anyone. Assets are also immediately available and traders could use cash payments. This is why some people will refer to spot markets as cash markets. Mainly because traders can opt for cash to make upfront payments. 

A centralized exchange such as Binance or Coinbase manages the spot trading interface, regulatory compliance, security and custody of the assets. Each spot trader pays transaction fees, which are used for running the exchange. Decentralized exchanges, on the other hand, run a similar service but one based on blockchain smart contracts.

Trading spot markets is the simplest and most basic way of investing in the cryptocurrency industry. It is also the first transaction that takes place when perhaps someone wants to buy and hodl a digital coin. Also, remember spot markets exist in traditional markets, think of bonds, forex and shares. 

The basic working of a spot market transaction

There are three important aspects to take into consideration when understanding spot trading on the Binance Exchange. These include the spot price, the market order and the volume. 

The spot price is the current market price of the digital asset. Then there is the market order on the exchange, which allows traders to buy or sell their crypto holdings at the best spot price. The price on the order book could change at any time given the volatility of crypto. Therefore, there is no guarantee of buying or selling the asset at a different price as the system processes your market order. 

Sometimes the volume might be inadequate to fill your order at your intended price. For instance, you made an order of 5 BTC at the spot price. The system only has 2 BTC on offer. Therefore you will have to wait for your order to fill to 5 but at different prices.  Nonetheless, note that spot prices update in real-time and depend on order matches. If you are using an OTC platform, the spot prices work differently because there is no order book. However, unlike an exchange – delivery is not immediate on OTC and might take you T+ 2 days. T+ 2 translates to the date of the trade and additional two business days. 

You can trade spots on either a centralized or decentralized exchange. Decentralized exchanges provide more privacy and freedom compared to centralized exchanges. However, this freedom and control come with a high risk. Lack of KYC, customer support and AML policies is a big puzzle when cybercriminal incidents take place. Only a few decentralized exchanges such as the Binance DEX use an order book. 

A recent development is Pancake Swap and Uniswap’s Automated Market Maker (AMM).  An automated market maker is a smart contracts program for implementing different models for determining asset prices. Interested buyers pool funds into a liquidity pool or LP and swap their tokens. A liquidity provider earns from charging transaction fees to anyone that uses the LP. 

How to spot trade on Binance?

Spot trading on Binance is an easy step-by-step process. Just go to the Binance homepage after registration and identity confirmation. Hover your cursor on the [Trade] navigation bar and pick [Spot] from the drop-down. 

This will usher in the trading view – a trade control panel with several different sections for different capabilities. 

I labelled the screenshot of the trading view page to help provide a key. Here are more details: 

1. Number 1 is a label of the cryptocurrency trading pair and a few details concerning its market such as volume, daily price change and the daily high and low. 
2. Then there is the order book at number 2. This is a list of the assets open buy and sell orders sorted by price. The green list contains buy orders while the red list contains sell orders. When making a buy order for a given asset, traders pick the lowest offered price. When a particular order needs a higher volume to fill, the order moves to the next best lowest ask price. 
3. Number 3 contains the chart view with personalized historical price information. TradingView is also pre-built on this window and installed with a diverse range of technical analysis tools.
4. Number 4 at the top right corner contains a search button for different trading pairs. This is the place where you pick your crypto pair and go on to trade. Binance allows you to bookmark your favourite pairs by clicking the rating stars near them. Take note that it is not compulsory to purchase crypto using fiat. You can interchange between different altcoins at spot prices by picking the right pairs. 
5. Number 5 is where you create your buy or sell orders. There are three types of orders you can create, a Limit, market and a stop-limit order. 

Thinking of an example of a perfect Binance exchange spot trade? Here is one: 

Jack wants to place a market order of $1000 (BUSD) worth of Bitcoin. This will happen by hovering over the Total Field and clicking [Buy BTC]. Then the exchange automatically and immediately delivers the BUSD to the seller, and then you receive $1000 (BUSD) worth of Bitcoin in your Binance spot wallet.

Advantages of the Binance spot market

1. Transparency of the order book – Spot prices rely on the forces of demand and supply. This is quite different from the futures market which is reliant on multiple reference prices. Note that the futures market usually derives its price from market data such as the moving average, price index and funding rate. This makes tracing futures market prices relatively difficult compared to spot market prices.
2. Straightforwardness – Spot trading is direct, simple and straightforward. There are few rules and associated risks are low. It’s also easy to calculate the risk and reward based on the entry price and the current price. 
3. Set and forget – There is no fear of being liquidated when trading spots. This is unlike margin and derivatives trading where traders could incur significant risk and maybe even get liquidated. Traders can easily open or exit a trade whenever they want on the spot market. This means spots are the best way to buy and hodl. 

Disadvantages of the Binance spot market

1. Some spot assets are inconvenient to hold – think of buying crude oil as a spot purchase, one might have to contend with the physical delivery of the asset. On the other hand, spot-purchasing cryptocurrency gives you the responsibility of safeguarding and securing them on convenient cold or hot storage.
2. Some individuals and businesses require stability rather than the volatile nature of particular assets. For instance, spot assets would make it difficult to operate a foreign currency in an operation where the team needs thorough expenditure planning and evaluation. 
3. Potential profit is low when trading spot markets as compared to trading margins or futures. The latter allows you to leverage capital and trade bigger positions. 

Binance spot trading frequently asked questions (FAQ)

1: Where can you trade spots market?

There are multiple ways of trading spot markets. Besides spot trading on an exchange, one could opt for an over-the-counter OTC solution. You could also trade with other individuals directly and without a third party through a decentralized exchange such as the Binance DEX. Each market platform has its own distinct features. 

2. What is a centralized exchange?

A centralized exchange manages the trading assets of the platform. This makes it an intermediary between market participants, and also as the custodian of the assets being traded. One needs to fund their account or exchange wallet with either fiat or crypto before getting started with trading.  A quality exchange safeguards user funds and ensures transactions take place smoothly. Other roles of a centralized exchange include managing user KYC (Know your Customer), meeting regulatory compliance, setting fair prices and providing customer protection. The users then pay transaction fees in return. This makes exchanges profitable in both bull and bear markets, this is as long as they maintain sufficient trading volume and adequate users. Binance is a centralized exchange. 

3.What is a Decentralized exchange?

Decentralized exchanges of DEX provide the same services as a centralized exchange. Unlike a centralized exchange, match buying and selling are made possible through blockchain smart contracts. DEX does not ask users to create accounts but allows them to trade directly with each other without the need for the exchange to act as a custodial platform. Transactions take place directly from individual traders’ wallets through the power of smart contracts. Smart contracts are self-executing programs hosted on the blockchain. 

4.What is the Over-the-counter spot trading?

Over-the-counter (OTC) is also known as off-exchange trading. Usually, traditional financial assets are traded directly between traders, brokers and dealers. Spot trading through an off-exchange takes place through multiple communication methods for organizing the transaction. These methods could be instant messaging and phone calls. OTC transactions do not require an order book and this comes with a level of advantage. Exchanges for example might not be able to fill an order with the intended price due to volume fluctuations. Hence causing a price slippage across the majority of small-cap coins. This causes traders to make orders at high prices in order to have their orders filled. Nonetheless, even coins with high liquidity due experience slippage. Especially when the order is large. Hence, you could consider the benefits of an OTC when spot trading large amounts of BTC.

Conclusion

While trading the spot market is pretty simple and straightforward, traders should arm themselves with adequate technical analysis knowledge, sentiment tracking and sound knowledge of asset fundamentals.